Current State of the U.S. Property & Casualty Insurance Industry - PowerPoint PPT Presentation

Current State of the U.S. Property & Casualty Insurance Industry TRENDS & ANALYSIS AS OF JULY 25, 2018

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 Contents The U.S. P&C Industry 3 - 16 U.S. Surplus Lines Industry 17 - 33 Reinsurance 34 - 38 Catastrophes 39 - 55 Lloyd’s 56 - 58 Catastrophe Bonds 59 - 60 2 2

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 The U.S. P&C Industry Brief summary of the state of the U.S. P&C Industry at the time of this presentation. Just a few sentences that summarize what the trends and analysis are pointing to. 3 3

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Policyholder Surplus vs Combined Ratio 1975 – 2018:Q1 BILLIONS 130% $800 Capacity as of 3/31/18 was $734.1B, up 46.8% from 12/31/07 which was $517.9B. $700 125% $600 120% $500 115% 110% $400 $300 105% $200 100% 95% $100 90% $0 ‘75 ‘76 ‘77 ‘78 ‘79 ‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 Q1 Combined Ratio (Right Scale) 4 4 Source: A.M. Best, ISO, Insurance Information Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 Overall U.S. P&C Industry Profitability 1994 – 2018:Q1 Combined Ratio Return on Average Surplus (Left Scale) (Right Scale) 120% 15% 12% 115% 9% 110% 6% 105% 3% 100% 0% 95% -3% 90% ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 Q1 5 5 Source: A.M. Best

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 Underwriting Gain (Loss) 1975 – 2018:Q1 $35 Billions $25 U.S. P&C industry has experienced profit from its underwriting activity $15 in only 8 of the last 42 years. $5 -$5 -$15 -$25 -$35 -$45 -$55 ‘75 ‘76 ‘77 ‘78 ‘79 ‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 Q1 6 6 Source: Insurance Information Institute from A.M. Best and ISO data.

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 P/C Industry Net Income After Taxes* 1997 – 2018P $Millions (2017 Dollars) The median profit for this $100,000 21-year period is about $90,000 $40 billion. $79,122 $80,000 $73,444 $70,000 $66,839 $57,808 $60,000 $57,024 $56,155 $55,315 $49,760 $50,000 $46,157 $43,500 $42,900 $39,971 $39,527 $40,000 $36,123 $35,816 $32,591 $32,107 $29,124 $30,000 $21,080 $20,000 $9,612 $10,000 $4,140 $3,387 $0 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18P *Adjusted for inflation using the BLS CPI calculator 7 7 Source: A.M. Best; ISO, a Verisk Analytics company; Insurance Information Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. P&C Industry Quarterly Change in Commercial Rates 2004 – 2018:Q1 Percent 6 4 2 0 -2 -4 -6 -8 Rates increase for the 2 nd consecutive -10 quarter. -12 -14 -16 Source: Council of Insurance Agents & Brokers 8 8

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Property & Casualty Insurers Quarterly Cash Flow BILLIONS $27 $24 $21 $18 $15 $12 $9 $6 $3 $0 -$3 -$6 -$9 -$12 -$15 -$18 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar ‘09 ‘09 ‘09 ‘09 ‘10 ‘10 ‘10 ‘10 ‘11 ‘11 ‘11 ‘11 ‘12 ‘12 ‘12 ‘12 ‘13 ‘13 ‘13 ‘13 ‘14 ‘14 ‘14 ‘14 ‘15 ‘15 ‘15 ‘15 ‘16 ‘16 ‘16 ‘16 ‘17 ‘17 ‘17 ‘17 ‘18 Operations Financing Investments 9 9 Source: Highline Data

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Property & Casualty Insurers Quarterly Net Cash Flow BILLIONS $18 $15 $12 $9 $6 $3 $0 -$3 -$6 Negative cash flow -$9 in 21 of the last 37 -$12 calendar quarters -$15 Net Cash Flow = -$18 Net cash from Operations + Net cash from Investments + -$21 Net cash from Financing -$24 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar ‘09 ‘09 ‘09 ‘09 ‘10 ‘10 ‘10 ‘10 ‘11 ‘11 ‘11 ‘11 ‘12 ‘12 ‘12 ‘12 ‘13 ‘13 ‘13 ‘13 ‘14 ‘14 ‘14 ‘14 ‘15 ‘15 ‘15 ‘15 ‘16 ‘16 ‘16 ‘16 ‘17 ‘17 ‘17 ‘17 ‘18 10 10 Source: Highline Data

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Property & Casualty Insurers Annual Cash Flow $ BILLIONS $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$20 -$30 -$40 -$50 -$60 -$70 -$80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Operations Financing Investments 11 11 Source: Highline Data

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Property & Casualty Insurers Annual Net Cash Flow $ BILLIONS $24 Negative for five $21 of the last $18 fourteen years. $15 $12 $9 $6 $3 $0 -$3 -$6 -$9 Net Cash Flow = Net cash from Operations + -$12 Net cash from Investments + -$15 Net cash from Financing -$18 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 12 12 Source: Highline Data

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 10-Year U.S. Treasury Rates Quarterly Data 1982 – June 18, 2018 PERCENT 16 A 10 year old Treasury Bill purchased on June 18, 2008 14 had a rate of 4.22% That 10 year old T Bill matures 12 and is replaced by the June 18, 2018 T Bill earning 2.92% 10 That’s a 30.8% reduction in investment income. Thus the 8 greater pressure for better underwriting income. 6 4 In 2017 Bonds were 62% of the U.S. P&C Industry’s 2 Investment Portfolio 0 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 13 13 Source: Federal Reserve Bank of St. Louis; Insurance Information Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 U.S. Combined Ratios 2010 – 2017E 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 2013 2014 2015 2016 2017 Personal Lines Commercial Lines 14 14 Source: A.M. Best, Swiss Re Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 Auto Net Combined Ratio Loss ratios have been rising for a decade. 2015 return on net worth is likely close to zero or negative. 115% 110% 105% 100% 95% 90% 85% 80% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Commercial Personal 15 15 Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence; Insurance Information Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 2016 Property & Casualty Insurance Regulatory Report Card 48% Graded “C” Or Less = A Not Graded: District of Columbia = B = C = D = F 16 16 Source: R Street Insurance Regulation Report Card, December 2016; Insurance Information Institute

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 The U.S. Surplus Lines Industry Brief summary of the state of the U.S. Surplus Lines Industry at the time of this presentation. Just a few sentences that summarize what the trends and analysis are pointing to. 17 17

Current State of the U.S. Property & Casualty Insurance Industry / Trends & Analysis as of 7/5/18 The Surplus Lines Marketplace 1988 – 2017 $45,000 9% 9.0% $40,000 8% 8.0% Percent of Total P&C $35,000 7.0% 7% Written Premium (Millions) $30,000 6.0% 6% Percent of Total P&C Percent of Total P&C 5% $25,000 5.0% 4% $20,000 4.0% 3% $15,000 3.0% Total U.S. Surplus Lines Written Premium 2% $10,000 2.0% 1% $5,000 1.0% 0% $0 0.0% '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: A.M. Best Co. 18 18